For better or worse, the tax laws are designed not just to collect revenue. They also aim to encourage certain types of behavior, such as being charitable or investing in risky enterprises that, if successful, lead to job creation.
By JAY MILLER | Aug. 9, 2016
The Journal Sentinel recently reported in a front-page story that Milwaukee County Executive Chris Abele paid no state income taxes from 2001 to 2014. It juxtaposed the headline “Abele paid zero state taxes over 14 years” with the sub-headline “County executive is worth millions.” The headlines seem to suggest that Abele must have done something unethical or illegal.
He didn’t, however. To the contrary, it appears Abele complied with the tax laws as written and as intended to be applied.
The body of the article includes the observations from several tax experts, who — despite what the headlines intimate — acknowledge as much. Although we can’t know for sure how Abele ended up not owing any state income taxes (because his tax returns remain confidential), there are several legitimate routes he could have taken to achieve such a result.
To begin with, he could have reduced his federal income taxes by as much as one-half by making charitable contributions to qualified organizations, which translates into a tax credit at the state level. Indeed, Abele said in the article that he “routinely” donated more than what he could deduct (or claim as a credit) in a given year, indicating that his charitable instincts exceeded any desire he may have had to avoid taxes.
Moreover, Abele over the years has invested in several companies, including start-ups, that likely generated losses, at least for a while. The law allows, subject to certain restrictions, losses that pass through from partnerships and limited liability companies to reduce or eliminate taxable income from other sources.
Finally, Abele may have been a shareholder in profitable corporations whose earnings wouldn’t show up on his individual returns until and unless the corporations actually paid out those earnings to him as dividends or a salary.
Given the amount of Abele’s wealth, you can be reasonably sure that the Wisconsin Department of Revenue checks his returns, at least on occasion, to verify that he is not taking positions that run afoul of the tax rules.
But there is a larger point to be made here that the Journal Sentinel article ignores. For better or worse, the tax laws are designed not just to collect revenue. They also aim to encourage certain types of behavior, such as being charitable or investing in risky enterprises that, if successful, lead to job creation for the benefit of the entire community. What Abele is doing is what the law envisions.
One could reasonably argue that the tax laws should not try to influence behavior. Yet, that is not the system our state Legislature (or Congress, for that matter) has devised. The Legislature has made a calculated decision that the state is better off with Abele and other wealthy individuals spending money in certain tax-favored ways than simply paying taxes in lieu of such expenditures.
The Journal Sentinel article also notes that Abele acquired “much of his fortune from his father, who co-founded Boston Scientific, a publicly traded medical device company.” If so, it is quite possible that his father paid a hefty transfer tax (to the federal government and maybe the State of Massachusetts) in the process, even after taking into account applicable gift tax exemptions. The point here is that to the extent Abele may not have paid a tax yet on some of his wealth, his father probably has — so in a larger sense, the government has received its due.
If voters have a problem with how our tax system is designed, which also carves out lots of benefits for less well-to-do taxpayers, they ought to take it up with their elected representatives.
But Abele should not be scolded for doing what the law allows. Over 80 years ago, the famous jurist, Learned Hand, said that one does not have a patriotic duty to pay any more in taxes than he or she legally owes. That is equally true today in the case of Chris Abele and other taxpayers, no matter their wealth.
The press has a duty and right to hold public officials accountable for their actions, even those of a private nature that might reflect on their public duties. The fact that Abele hasn’t paid state income taxes for several years, however, does not fit into that category and did not merit a front-page story.
Jay Miller of Whitefish Bay is a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business. This column represents his personal opinion.